An extremist, not a fanatic

July 11, 2014

Unions & productivity

But what do they do to productivity? The standard Tory line for years has been that militant unions are wreckers. The facts, though, tell a different story.

Academic research based upon comparisons of unionized and non-unionized workplaces has found little impact. One meta-analysis (pdf), for example, concludes that the link between unions and productivity is "near zero": it's slightly negative in the UK but positive in the US.

A cross-country comparison, though tells a different story. My chart plots GDP per worker in 2013 against union density for 33 OECD countries. Across all 33, the correlation is positive, at 0.4. Eyeball econometrics should tell you this finding is robust to outliers.

The US - which has high productivity and low union membership - is an exception. More generally, union membership is associated with higher productivity across countries.

You might wonder how the cross-country evidence shows a positive correlation whereas the cross-workplace evidence generally doesn't. Here's a theory. People will always want better pay and conditions. This is simply because they are human. If they can't achieve these through unions they will try to get them through the ballot box, in the form of legislation.

In this sense, as Philippe Aghion and colleagues show, there can be good and bad equilibria; a good equilibrium in which there are strong unions and litte legislation, and a bad one in which there are weak unions and much regulation.

The UK fits their story. Whereas in the 70s businessmen complained about unions, they now whine about minimum wage laws and red tape.

But here's the thing. Regulation is a bad substitute for unions. Regulation is inflexible. Whereas collective bargaining - when done intelligently - can respond to different local conditions.

This might seem like an odd argument, because lefties tend to want both regulation and unions whereas righties want neither. But insofar as there is a trade-off, strong unions are to be preferred.

Which poses the question: if unions are good for productivity, why have bosses traditionally been opposed to them? The answer, I suspect, lies in this paper, which finds that unionization "is significantly associated with lower levels of total CEO compensation."

Trades unions, then, promote the national interest, whereas hostility to them is founded upon narrow sectional interests.

Comments

Two questions:
1) what exactly is the "national interest"?
2) assuming your argument is correct, which way does causation run? From unions to productivity or from productivity to unions? And how do we know?

@ Paul - in many contexts, I share your scepticism about the "national interest". However, I think it's reasonable to assume that higher productivity is in the national interest, simply because it has the potential to make everyone better off and nobody worse off.
The question of endogeneity is a good one, that bedevils cross-workplace comparisons. However, my chart lessens this problem. In using latest available data, I'm comparing productivity in 2013 to union density in various latest years, generally 2008-12.

A bit suspicious of whether correlation = causation here. I checked the top 5 GDP where there is high union density in Belgium,Luxembourg and Norway and low density in USA and France. One might suspect the high union density in Belgium & Lux to be a hangover from the steel industries and their linked cultures whereas Norway is an oil economy run by the state - a high union density no surprise. A bit curious as to why union density is low in France.

Then looked at the lowest 5 Chile, Hungary, Korea, Poland and Turkey. All have pretty low union density with Chile and Hungary on the higher side at 15 and 17% - historical reasons probably.

So not really convinced there is a real causation here, need to look a bit deeper I reckon.

There was an article in Capital and Class about 20 years ago, about Taylorism in the US in the 1920's, which set out that the unions established a rapport with them, because the Taylorists saw the existing managements as bureaucratic, amateurish and inefficient.

The unions saw this as obviously beneficial to their cause, to be able to blame management, but also Fordism had suggested to them that their own prosperity was tied to the prosperity of the company, so if the Taylorists could make the company more productive, hence more profitable, it would facilitate better pay and conditions for them.

The evidence seems to confirm Marx's view against Weston that in the long-term, unions do not raise wages above what they would have been anyway. Periods of rising wages are usually periods of an improvement in the demand for labour-power against the available supply. Unions main role industrially is in defending conditions over health and safety etc.

But, as Marx says, there real role should be to organise workers for more viable longer term solutions such as creating co-operatives, developing their own party, and fighting on a range of wider social issues.

Many economists on the right now recognize that inequity has reached a level that is detrimental to market economies.

And then the go through a looking glass...

To address this problem, most of them, especially some of the more libertarian leaning ones, are seriously talking about the need for a national minimum income. But they won't even consider the value of strong unions. It's like it does not even cross their minds

Which is more market oriented...
Strong Unions able to negotiate a better cut, but always having to consider the business side of their demands...
Or big government directly transferring wealth ?

Put in libertarian terms...it seems that they would rather have the government stealing from the wealthy than have the common man organize to extort from them.

"The evidence seems to confirm Marx's view against Weston that in the long-term, unions do not raise wages above what they would have been anyway."

Weston was actually arguing that workers were wasting their time struggling to raise wages as this would just lead to increased prices. Marx took Weston to task on this theory. He had 2 basic points - firstly it wouldn't be prices but profits that would be affected and secondly, the standard of living is variable. So while capitalists constantly tried to reduce workers to the minimum subsistence in reality workers could struggle to raise their existence above this minimum, as the standard of living was historically and social derived. Marx did, however, think that capital had the upper hand and that workers primary objective was to overthrow capitalism.

Though Boffy rejects Marx's argument here and believes capitalists want to raise workers wages, e.g. Fordism. So it is surprising that Boffy uses this work to advance his arguments when he rejects one of it's major premises!

Unions tend to thrive in "moated" sectors, or sectors where the barriers to entry are high. This is why we see so many Unions in the public sector. One very good moat is capital intensity, which also translates to high productivity (on a manpower basis) by definition. So it is not surprising that countries with capital intensive industries, such as steel and oil and gas, are more productive on a manpower basis. So it could be that this is a false correlation.

@Alien Visitors
Haven't heard of the "moated" sector theory before? Some industries are protected naturally from competition, this is what is meant by a moat or defense. Buffett likes to invest in companies that he thinks have moats, because their business is protected from competition, and make higher returns. But this return could be captured instead by unions instead of shareholders. My main point was really that moated sectors are the ones most likely therefore to be unionized. Here is a quote from a study done by Danny Blanchflower (generally seen as a supporter of Unions) - ‘Distribution, Hotels and Catering’ is the industry with the
lowest probability of unionisation, while this probability is
highest in ‘Energy and Water’. Which makes total sense in terms of moats in that it is pretty easy to enter the hotel or catering trades, but setting up your own water distribution company is pretty hard. (link to a summary of the study here; http://cep.lse.ac.uk/pubs/download/cp268.pdf ).

I mentioned the public sector since by definition at the highest level they are not subject to competition at all (try setting up an alternative public sector). Also the public sector, since they have the right to tax people, would have a hard time running out of money (although in some countries, like Argentina, they have managed to drive the country to bankruptcy). So, again at a high level, they have the best possible moat. Hence Unions can be more common in the public sector. Now your point about contracting out certain public services is actually supporting my point. The reason that certain people want to contract public services is exactly in line with the moat theory. They are contracting out to create competitions. But much of the state is still not contracted out. This study would give you an idea of the state of completion in the public sector, http://www.nao.org.uk/wp-content/uploads/2013/11/10296-001-Delivery-of-public-services-HC-8101.pdf. They quote about half of public service revenue in the UK is contracted out.

Unions (and Management) are not all equal. Some union/management traditions, like the German ones, work together for the benefit of all in the company. UK ones were much more adversarial. I would expect the nature of the relationship between unicns and management to be key for productivity.